40+ Credit Risk Analyst Interview Questions and Answers

Multiple imputation can be used to impute missing values by creating multiple datasets with imputed values.

• Use multiple imputation to create multiple datasets with imputed values

• Combine the results from the multiple datasets to obtain a final imputed dataset

• Consider using predictive models to impute missing values

• Evaluate the quality of imputation using metrics such as mean squared error or R-squared

Outlier analysis involves identifying and treating data points that are significantly different from the rest.

• Identify outliers using statistical methods such as box plots, scatter plots, and z-scores.

• Determine the cause of the outlier and decide whether to remove it or keep it in the dataset.

• Consider the impact of outliers on the analysis and adjust the model accordingly.

• Use techniques such as winsorization or data transformation to treat outliers.

• Repeat the analysis after t...read more

Before providing a loan, I check the customer's credit score, income, employment history, debt-to-income ratio, and collateral.

• Credit score

• Income

• Employment history

• Debt-to-income ratio

• Collateral

Variable selection can be done using techniques like correlation matrix, stepwise regression, and principal component analysis.

• Check for correlation between variables using correlation matrix

• Use stepwise regression to select variables based on their significance

• Perform principal component analysis to identify important variables

• Check for multicollinearity using variance inflation factor (VIF)

• Consider domain knowledge and business requirements while selecting variables

Model performance of classification models can be tested using various metrics.

• Use confusion matrix to calculate accuracy, precision, recall, and F1 score.

• ROC curve and AUC can be used to evaluate model's ability to distinguish between positive and negative classes.

• Cross-validation can be used to test model's performance on different subsets of data.

• Use lift charts to compare model's performance with random selection.

• Use KS statistic to measure the separation between positive...read more

The relationship between two features can be measured using correlation coefficient.

• Calculate the correlation coefficient using statistical methods.

• Correlation coefficient ranges from -1 to 1.

• A positive correlation indicates a direct relationship between the features.

• A negative correlation indicates an inverse relationship between the features.

• A correlation coefficient of 0 indicates no relationship between the features.

Global economic indicators suggest a possible recession.

• Trade tensions between US and China have led to a slowdown in global trade.

• Many countries are experiencing low economic growth rates.

• Central banks are cutting interest rates to stimulate growth.

• Inverted yield curves in bond markets indicate investor pessimism.

• Political uncertainty, such as Brexit, is causing instability in markets.

Loss function in Logistic Regression measures the difference between predicted and actual values.

• It is used to optimize the model parameters during training.

• The most common loss function used in logistic regression is the binary cross-entropy loss.

• The goal is to minimize the loss function to improve the accuracy of the model.

• The loss function is calculated using the predicted probabilities and the actual labels.

• Other loss functions used in logistic regression include hinge lo...read more

Logistic Regression is a statistical method used to analyze and model the relationship between a binary dependent variable and one or more independent variables.

• It is used when the dependent variable is binary (0 or 1).

• It estimates the probability of an event occurring based on the values of the independent variables.

• It is commonly used in credit risk analysis to predict the likelihood of default.

• It can also be used in marketing to predict the likelihood of a customer making ...read more

P value is the probability of obtaining a result as extreme or more extreme than the observed result, assuming the null hypothesis is true.

• P value is used in hypothesis testing to determine the significance of a result.

• A small p value (less than 0.05) indicates strong evidence against the null hypothesis.

• A large p value (greater than 0.05) indicates weak evidence against the null hypothesis.

• P value should not be used as the sole criterion for accepting or rejecting a hypothes...read more

Program to check if 4 coordinates form a square

• Calculate distance between all pairs of points

• Check if all distances are equal

• Check if diagonals are equal

• Use Pythagorean theorem to calculate distance

Financial ratios used in credit risk assessment

• Debt-to-Equity Ratio: measures the amount of debt used to finance a company's assets

• Current Ratio: measures a company's ability to pay its short-term debts

• Interest Coverage Ratio: measures a company's ability to pay its interest expenses

• Profit Margin Ratio: measures a company's profitability

• Asset Turnover Ratio: measures a company's efficiency in using its assets to generate revenue

Jet Airways

• Jet Airways, once India's largest private airline, filed for bankruptcy in April 2019

• The airline had accumulated a debt of over Rs 8,000 crore

• Jet Airways had to ground all its flights and lay off thousands of employees

DCB Bank's market share and market capitalisation are as follows:

• As of August 2021, DCB Bank's market share in terms of deposits was 0.7%.

• As of August 2021, DCB Bank's market capitalisation was approximately INR 5,800 crores.

• DCB Bank's market share and market capitalisation may fluctuate over time based on various factors such as economic conditions, competition, and regulatory changes.

Banks use various financial statements for credit calculations.

• Income statement

• Balance sheet

• Cash flow statement

• Statement of retained earnings

• Financial ratios

• Credit reports

Amex operates on an open loop business model.

• Amex operates as a payment network that partners with various merchants and banks to process transactions.

• Open loop systems allow for transactions to be made at a wide range of merchants, both online and offline.

• Examples of open loop systems include Visa, Mastercard, and Discover.

Xgboost parameters include learning rate, max depth, subsample, colsample by tree, and more.

• Learning rate controls the step size during training.

• Max depth limits the depth of each tree.

• Subsample controls the fraction of observations to be randomly sampled for each tree.

• Colsample by tree controls the fraction of features to be randomly sampled for each tree.

• Other parameters include min child weight, gamma, and lambda for regularization.

The loss function used in Xgboost is customizable and can be specified by the user.

• Xgboost supports various loss functions such as binary logistic regression, multi-class classification, and regression.

• The default loss function for binary classification is logistic regression while for regression it is mean squared error.

• Users can specify their own loss function by defining a custom objective and evaluation function.

• The objective function measures the difference between predi...read more

Assessing cash credit account statement involves analyzing the inflow and outflow of funds, identifying any discrepancies, and evaluating the borrower's creditworthiness.

• Review the account statement for any irregularities or inconsistencies

• Check the borrower's payment history and credit score

• Assess the borrower's financial stability and ability to repay the loan

• Compare the account statement with the borrower's financial statements and tax returns

• Consider any external factors ...read more

Demonetisation had a mixed impact on SMEs in India.

• SMEs with a large cash component were hit hard initially

• Digital payments and formalisation of the economy benefited some SMEs

• Overall, the impact on SMEs was not as severe as on larger businesses

• SMEs in rural areas faced more challenges due to lack of digital infrastructure

• Some SMEs had to shut down due to cash flow issues

Solvency ratio measures a company's ability to meet its debt obligations. Short term ratio focuses on current assets and liabilities, while long term ratio considers long term debt.

• Short term solvency ratio is also known as the current ratio

• It measures a company's ability to pay off its short term debts with its current assets

• Formula: Current assets / Current liabilities

• Long term solvency ratio is also known as the debt to equity ratio

• It measures a company's ability to pay of...read more

Variable importance can be tested using various methods such as permutation importance, drop column importance, and SHAP values.

• Permutation importance involves randomly shuffling the values of a variable and measuring the decrease in model performance.

• Drop column importance involves removing a variable from the model and measuring the decrease in model performance.

• SHAP values provide a measure of the contribution of each variable to the model output.

• Other methods include corr...read more

Hedge funds are pools of capital managed aggressively while private equity invests in private companies with the aim of improving their operations.

• Hedge funds are more actively managed and use a variety of investment strategies to generate high returns.

• Private equity firms invest in private companies with the aim of improving their operations and then selling them for a profit.

• Hedge funds are typically open to a wider range of investors, while private equity is usually only a...read more

Demonetization had a mixed impact on the banking sector.

• Initial impact was negative due to liquidity crunch and increased NPAs

• However, in the long run, it led to increased deposits and digital transactions

• Banks had to invest in technology to support digital transactions

• Demonetization also led to increased financial inclusion and formalization of the economy

Digitalization is helping banks in multiple ways.

• Improving customer experience through online banking and mobile apps

• Reducing operational costs through automation and digitization of processes

• Enhancing risk management through data analytics and AI

• Enabling faster and more efficient transactions through blockchain technology

• Expanding customer base through digital marketing and social media

• Providing personalized financial advice through robo-advisors

• Increasing transparency and s...read more

EAD is calculated using the formula EAD = Exposure at Default = PD x LGD x EAD

• Calculate Probability of Default (PD) based on historical data and credit rating

• Determine Loss Given Default (LGD) based on collateral or recovery rate

• Use the formula EAD = PD x LGD x EAD to calculate Exposure at Default

Asset liability mismatch is when a company's assets and liabilities have different maturities or interest rates.

• Occurs when a company's assets and liabilities have different maturities or interest rates

• Can lead to financial instability and liquidity problems

• Example: A bank that borrows short-term funds to lend long-term

• Can be managed through asset-liability management techniques

Financial ratios are tools used to analyze a company's financial performance and health by comparing different aspects of its operations.

• Financial ratios are used to evaluate a company's profitability, liquidity, solvency, and efficiency.

• Examples of financial ratios include: debt-to-equity ratio, return on equity, current ratio, and gross margin.

• These ratios help investors, creditors, and analysts assess the financial health of a company and make informed decisions.

• Understand...read more

Counterparty risk is the risk of default by a party in a financial transaction, while credit risk is the risk of loss due to a borrower's failure to repay a loan.

• Counterparty risk is specific to financial transactions involving parties such as banks, brokers, or counterparties in derivatives contracts.

• Credit risk is more general and refers to the risk of loss due to a borrower's failure to repay a loan or meet other financial obligations.

• Counterparty risk is typically associa...read more

Credit Analyst assesses the creditworthiness of individuals or companies by analyzing financial data and determining the likelihood of repayment.

• Evaluate financial data such as income, assets, debts, and credit history

• Assess risk factors and determine credit ratings

• Make recommendations on credit limits and terms

• Monitor and review credit accounts for potential risks

• Communicate findings and recommendations to management or clients

Financial BG is for payment obligations while Performance BG is for non-payment obligations.

• Financial BG is used to guarantee payment obligations such as loans, taxes, and customs duties.

• Performance BG is used to guarantee non-payment obligations such as completion of a project or delivery of goods.

• Financial BG is typically issued by banks while Performance BG can be issued by insurance companies or other financial institutions.

• Financial BG is usually a fixed amount while Per...read more

Different classes of assets include fixed assets, current assets, intangible assets, and financial assets.

• Fixed assets: Tangible assets like property, plant, and equipment

• Current assets: Liquid assets like cash, accounts receivable, and inventory

• Intangible assets: Non-physical assets like patents, trademarks, and goodwill

• Financial assets: Investments like stocks, bonds, and derivatives

Counterparty credit risk is the risk of loss due to a counterparty's failure to meet its financial obligations.

• It is the risk that a counterparty will default on a financial obligation

• It is a type of credit risk that arises from the potential that the counterparty will not fulfill its contractual obligations

• It can be mitigated through credit analysis and risk management techniques

• Examples include the risk of a borrower defaulting on a loan or a company failing to pay its supp...read more

As a Credit Risk Analyst, I typically deal with loan limits ranging from $10,000 to $1,000,000 depending on the client's creditworthiness.

• Loan limits can vary based on the client's credit score, income, and financial history.

• I have experience analyzing and approving loans ranging from small personal loans to large commercial loans.

• The maximum loan limit I have dealt with is $1,000,000 for a commercial real estate project.

• I work closely with underwriters and financial institut...read more

Pre and post shipment facilities refer to credit facilities provided to exporters before and after shipment of goods.

• Pre-shipment facility is a credit facility provided to exporters to finance the production and processing of goods before shipment.

• Post-shipment facility is a credit facility provided to exporters to finance the period between shipment of goods and receipt of payment from the importer.

• Pre-shipment facility can be in the form of packing credit, which covers expe...read more

Financial statements include balance sheet, income statement, and cash flow statement. Ratios include liquidity, profitability, and solvency ratios.

• Balance sheet shows a company's assets, liabilities, and equity at a specific point in time

• Income statement shows a company's revenue, expenses, and net income over a period of time

• Cash flow statement shows a company's cash inflows and outflows over a period of time

• Liquidity ratios measure a company's ability to meet short-term ob...read more

Shriram Finance is a leading non-banking financial company in India, specializing in vehicle financing.

• Established in 1974

• Offers a wide range of financial products including loans for commercial vehicles, passenger vehicles, and construction equipment

• Has a strong presence in rural and semi-urban areas

• Part of the Shriram Group, a prominent conglomerate in India

The 5 Cs of credit are character, capacity, capital, collateral, and conditions.

• Character refers to the borrower's credit history and reputation.

• Capacity refers to the borrower's ability to repay the loan based on income and expenses.

• Capital refers to the borrower's assets and net worth.

• Collateral refers to assets that can be used as security for the loan.

• Conditions refer to the purpose of the loan and economic conditions that may affect the borrower's ability to repay.

Ratio analysis involves using financial ratios to evaluate a company's financial performance.

• Ratio analysis is used to assess a company's liquidity, profitability, efficiency, and solvency.

• Types of ratios include liquidity ratios, profitability ratios, efficiency ratios, and solvency ratios.

• Liquidity ratios measure a company's ability to meet short-term obligations, such as the current ratio and quick ratio.

• Profitability ratios measure a company's ability to generate profits,...read more

SBLC stands for Standby Letter of Credit, which is a financial instrument used to guarantee payment.

• SBLC is a type of letter of credit that serves as a backup payment option for the beneficiary in case the buyer defaults on payment.

• It is often used in international trade transactions to reduce the risk of non-payment.

• The issuing bank guarantees payment to the beneficiary if the buyer fails to fulfill their payment obligations.

• SBLCs can be either funded or unfunded, depending ...read more

Credit risk refers to the potential loss that a lender may face if a borrower fails to repay a loan or debt.

• Credit risk is the risk of default on a loan or debt by a borrower.

• It is the possibility of loss due to non-payment of interest or principal by the borrower.

• Credit risk can be mitigated by assessing the creditworthiness of the borrower and setting appropriate terms and conditions.

• Examples of credit risk include default on a mortgage, credit card debt, or business loans....read more

A CAM sheet is prepared by analyzing the creditworthiness of a borrower and includes details about the borrower's financials, business operations, and management.

• Gather financial statements and other relevant documents from the borrower

• Analyze the borrower's financial ratios and performance indicators

• Assess the borrower's industry and market conditions

• Evaluate the borrower's management team and their experience

• Summarize the findings in a concise and clear manner

• Include recomm...read more

I have experience working with cloud services such as AWS, Azure, and Google Cloud.

• Managed data storage and processing on AWS S3 and EC2 instances

• Utilized Azure Machine Learning for predictive modeling

• Implemented Google Cloud Platform for real-time data analytics

PySpark is a Python API for Apache Spark, used for big data processing and analytics.

• PySpark is a Python API for Apache Spark, a distributed computing system.

• It allows for parallel processing of large datasets using Spark's distributed framework.

• PySpark provides high-level APIs in Python for Spark programming, making it easier to work with big data.

• Example: PySpark can be used for data preprocessing, machine learning, and data analysis tasks.